The USDA’s Rural Development Loan Program has been a boon for many different types of rural businesses across America, everything from for-profits to nonprofits, large and small businesses, retailers, manufacturers, those involved in our country’s domestic food supply chain, renewable energies sector, and more. However, among the thousands of industries and business types that have participated in the program, none may be taking greater advantage than those in the hospitality sector.
According to information released earlier this year by the USDA and reported on by DTN Ag Policy Editor Chris Clayton for Progressive Farmer magazine, the hospitality industry has been the nation’s top recipient of USDA Business & Industry Loan Guarantee (B&I) funding approvals. As of May 2022, this included $216.85 million in Business & Industry Loan Guarantees to buy, refinance, or renovate 31 hotels and motels across the country. This is in keeping with our experience at North Avenue Capital. We are America’s Rural Lender and the nation’s only lender dedicated exclusively to USDA Rural Development Loans. Hotel and Hospitality Loans make up almost 25% of our loan portfolio.
Why are USDA Hotel and Hospitality Loans so popular? For several reasons. According to Mordor Intelligence, the U.S. hospitality industry, which includes chain hotels, independent hotels, service apartments, budget and economy hotels, mid- and upper mid-scale hotels, and luxury hotels, had been growing steadily for years with rising numbers of travelers taking leisure trips, as well as business travel. The total value of bookings increased from $116 billion in 2009 to $185 billion in 2017.
The onset of the COVID-19 pandemic in 2020 significantly impacted this growth trend. That year, the U.S. hotel industry occupancy rate dropped to 44%, 33.3% less than in 2019. However, by 2021 with the pandemic waning and pent-up demand increasing, the occupancy rate rose to 57.6%, not quite at pre-pandemic levels, but returning to grow rapidly. Currently, the U.S. hotel occupancy rate is forecast to reach 63.4% by 2024 with a Hospitality Industry Compound Annual Growth Rate (CAGR) of 5.5% by 2027. As a result, hotel developers and investors are interested in purchasing, building, remodeling, and refinancing hotels and hospitality properties.
The USDA’s Business & Industry Loan Program for Hotel and Hospitality Loans, like all of the USDA’s Rural Development (RD) lending programs, is appealing due to its attractive terms. These include loan amounts ranging from $2 million to $25 million with terms that can extend out to 30 years. Interest rates are tied to the Wall Street Journal Prime Rate. Final terms are ultimately set by the lender based on factors such as the useful economic life of the asset(s) being financed, those used as collateral, and the borrower’s ability to repay.
USDA B&I Loans are collateral-backed lending programs. Borrowers must be able to securitize their requested funding amount with fixed assets (cash, property, equipment, etc.) of an equivalent value to the loan amount requested.
Although the Rural Development Program is designed to support lending for businesses in rural areas, the USDA’s definition of this eligibility requirement is “any town or city with 50,000 or fewer residents.” This represents 97% of America’s entire geographic territory. In addition – and a characteristic that works hand-in-glove with many hospitality franchises – companies with corporate headquarters in larger metro areas also may qualify if the actual business or branch being funded is located within a rural area.
In places like Florida, and all across the country, travelers are increasingly seeking out more rustic and relaxing experiences while exploring more domestic destinations. Thus, even the smallest rural areas are increasingly seeing more hotel/motel development. Hotels are needed for vacations, when visiting family, staying for business trips, near educational facilities, and more. For all of these reasons, USDA business loans for the hospitality industry are expected to remain a growing trend.
If you are interested in learning more about a USDA RD Business & Industry Loan for a hotel or hospitality business, then contact North Avenue Capital, today. We are USDA RD Hospitality Loan experts and work with clients in all 50 states. We can guide you through the USDA’s eligibility requirements, and loan application process.